Project Cycle: Appraisal/Negotiations

After the completion of the project preparation stage, the Bank reviews the proposal and undertakes a full-scale project appraisal. Appraisal covers comprehensive review of the technical, economic, social, financial and institutional aspects as well as the environmental aspects of the project proposal and lays the foundation for implementing the project and evaluating it when completed.


An appraisal mission examines such matters as the financing plan, components to be financed by IDB, terms and conditions of IDB financing, project procurement action plans, project implementation plans, and disbursement profiles. It also reviews the legal aspects of the project including the draft project financing agreement and conditions of effectiveness and concludes an understanding on these issues with the executing agency (and the government, if applicable). The appraisal mission and the beneficiary endeavour to agree on the measures necessary to assure the success of the project.


The draft project financing agreement is negotiated and, at the end of the appraisal mission work, a Memorandum of Understanding (MOU)/Minutes of Meeting reflecting the discussions and understanding reached by the appraisal mission and the beneficiary is signed.

Appraisal of a project is the Bank's responsibility but is conducted in full co-ordination with the Beneficiary. It is carried out by the Bank staff, supplemented by outside consultants if necessary. Appraisal activities cover the review and assessment of the following major aspects of a project:


Technical: The Bank has to ensure that projects are soundly designed, appropriately engineered, and follow accepted industry/sector standards. The appraisal mission looks into technical alternatives provided, solutions proposed and the results expected.


The technical appraisal is concerned with questions of physical scale, layout, and location of facilities. It looks into the technology to be used, including types of equipment or processes and their appropriateness to local conditions; the approach to be followed for the provision of services; how realistic the implementation schedules are; and the likelihood of achieving expected levels of output.


Institutional: The Bank mission verifies whether the Executing Agency is properly organised and its management and staff are adequate to handle the project, whether it needs capacity building support, setting up of a Project Management Unit (PMU), etc. This is essential in order to avoid problems that often arise during project implementation and operation. The executing agency is provided adequate financial and human resources both by the beneficiary and IDB to implement the project successfully and also to maintain and operate the project after it is completed. For implementation purposes, the establishment of a PMU is deemed essential. Both IDB appraisal team and the beneficiary discuss this matter along the following terms:

  1. Suitable type of PMU
  2. Selection of an adequate project manager, with a professional profile suitable for the assignment
  3. PMU set up
  4. Project Monitoring System and Project Performance Indicators
  5. Logistical support
  6. Functions of the PMU
  7. Reporting system
  8. Auditing
  9. Completion report

Economic: The project is studied thoroughly in its various sector settings. The investment program for the sector, the strengths and weaknesses of public and private sector institutions, and key government policies are all examined.


The project is subjected to a detailed cost-benefit analysis of alternative project designs, the result of which is usually expressed as an economic rate of return and the one that contributes most to the development objectives of the country may be selected.

"Shadow" prices are used routinely when true economic values of costs are not reflected in market prices as a result of various distortions, such as trade restrictions, taxes, or subsidies. The distribution of the benefits of a project and its fiscal impact are considered carefully. Since the estimates of future costs and benefits are subject to substantial margins of error, a sensitivity analysis is always made of the return on the project to variations in some of the key assumptions. Macro- economic benefits such as value added, effect on employment, generation of foreign exchange, etc., are also considered.


Financial: Financial appraisal has several purposes. One is to ensure that there are sufficient funds to cover the costs of implementing the project. Normally, the Bank does not finance the total project costs: the beneficiary or the government are expected to meet some or all of the local costs. In addition, other financiers may join to co-finance a project. Thus, project appraisal ensures IDB to a financing plan that will make funds available to implement the project on schedule. The appraisal mission should also discuss whether retroactive financing would be required, i.e. financing expenditures incurred and paid for by the beneficiary between the date of appraisal and the date of effectiveness of the project financing agreement. Such facility is to be used only in exceptional circumstances with appropriate justification. Some typical reasons are early project start-up, avoidance of gap between sequential projects, as in the case of repeater projects for financing intermediary on-lending operations, maintenance of momentum achieved during project preparation, and prevention of delays.

The retroactive financing covers items such as preinvestment work (e.g. engineering and architectural work), preliminary physical work (e.g. as access roads); office equipment for the PMU, etc.

The maximum permissible under retroactive financing is ten (10) percent of IDB total financing.

The financial appraisal is also concerned with financial viability. This includes an assessment of the enterprise?s ability to meet all its financial obligations, including repayments to the Bank; capability to generate enough funds from internal resources to earn a reasonable internal rate of return (FIRR) on its assets and make a satisfactory contribution to its future capital requirements, etc. The finances of the enterprise are closely reviewed through projections of the balance sheet, income statement, and cash flow. Additional safeguards of financial integrity may include establishing suitable debt-to-equity ratios or placing a limit on additional long-term financing. Other financial indicators such as break-even-point, liquidity and acid-test ratios, etc., may be calculated depending on the project type.


The financial review often highlights the need to adjust the level and structure of prices charged by the enterprise. It is also concerned with recovering investment and operating costs from project beneficiaries.


Social: Social assessment provides a benchmark on potential beneficiaries and the extent to which project benefits and costs will be distributed among them. Adverse effects are to be quantified and appropriate remedial actions put in place to alleviate them.


Another aspect of social appraisal is to have a better understanding of the local organisational arrangements (socio-cultural issues) so that these are incorporated in the design of the project for its successful implementation.


Environmental Impact: Environmental impact assessment has become an important tool in project design and selection due to the inseparable relationship between socio-economic development and environment. The decision to carry out such an assessment depends upon the nature and scale of the project and is done at the early stages of project preparation so that the final design incorporates the key environmental aspects.